What’s the Electricity Price Review (EPR) and why should you care?

For a long time now, electricity prices have been rising faster than inflation. According to MBIE research, Kiwi households are now paying a staggering 79% more for power than they did in 1990, while industrial users are paying only 18% more, and commercial businesses are paying 24% less (um, what?!). There are a few reasons why: distribution charges were passed on to residential customers, generation costs have increased along with retailer prices, and GST has risen from 10% to 15%.

Unfortunately, these compounding changes have had a heavy knock-on effect for Kiwi households, with one University of Otago study finding that nearly 20% of participants had gone without heating because they couldn’t afford it. In our humble opinion, when a family has no choice but to go without power in order to cover other bills, it’s a pretty clear indication that the current electricity system is broken, and failing those who it should be serving.

What is the EPR options paper and what does it mean?

The first EPR report highlighted a number of issues within the sector (issues that we’ve been very vocal about!) including prompt payment discounts, pricing imbalances between customers, and a lack of consumer voice. Yesterday the EPR panel has released its options paper, which provides recommendations for the problems it outlined in its first report. While these are only recommendations, it sets the stage for the Government to make its decisions later in the year. We wait with bated breath…

What came out of the options paper?

All in all, some fantastic and significant recommendations have been made. Here’s a brief run-down of what they’ve suggested:

Boost the consumer voice - Power to the people! Electricity use is a big part of our everyday lives; so much so, in fact, that it’s deemed a necessary service in order to maintain a healthy standard of living. Which means that, as electricity consumers, it’s also necessary that we’re given the support, services and opportunities for our voices and opinions on sector issues to be heard.

This is especially true for those who encounter energy hardship. The EPR has suggested a number of ways in which to help those in energy hardship, including establishing a cross-sector energy hardship group to bring together the key participants (from Government agencies right through to community advocates) to collaborate and drive initiatives that will make a real difference. They’ve also recommended establishing a community-level network that will provide electricity-specific support services, including trained advisors to help households implement changes to make their homes warmer and drier, and provide advice on switching and electricity plans. If it’s at all possible for retailers to be involved, this particular initiative is something that we’d love to get amongst!

In terms of financial support, the EPR has suggested setting up a fund to help those in energy hardship make their homes warmer, drier and healthier. The idea is that they’ll be able to draw upon the fund to help with the installation of things like thermal curtains, hot water cylinder insulation, LED lights and more efficient heating. The EPR also makes mention of furthering the Winter Energy Payment scheme to ensure it’s reaching those who need it most, in particular low-income households with energy needs.

Prohibit winbacks - A dirty tactic, winbacks are the goodies that get dangled in front of consumers who switch power companies (things like lower power prices, higher prompt payment discounts and TVs). Aside from hindering market competition, and in particular disadvantaging smaller retailers who have less financial means to offer rewards, winbacks also disadvantage those loyal customers who have never switched power companies (that’s 42% of households here in NZ!). Only those who are engaged with their power company and electricity use - around 21% of us - reap the rewards, and that’s not fair. The EPR has advised that winbacks should be prohibited (in line with our telecommunications industry), so we’re pretty happy to see this one come up!

Prohibit prompt payment discounts - Also known as late payment penalties in industry circles, prompt payment discounts have become a money-making scheme in themselves, adding between 10% and 26% to a household’s power bill which is well above the actual cost to retailers of a late bill payment. Rather than rewarding those who pay on time, prompt payment discounts heavily penalise our most vulnerable people who are most likely to miss a bill payment. So, of course, we’re thrilled to see the EPR recommendation that prompt payment discounts be axed. While late payment penalties will be allowed, they’ll be required to accurately reflect the cost to the retailer. That’s a win!

Last year Meridian announced that they’ll be getting rid of prompt payment discounts in order to be fair across the board, and they estimate it’ll see an approximate saving of $5 million a year for its customers. We hope it won’t be long before other retailers jump on board, too!

What about Flick’s UTS claim?

We’re yet to hear news on this from the Electricity Authority, but we’re excited to see that a number of issues raised in the EPR are the same ones that we, along with 3 other independent retailers and lines company, Vector (with support from Fonterra), highlighted in our UTS (Undesirable Trading Situation) claim, following the rocky market conditions of late last year. It’s super heartening to see that our concerns have been taken seriously and addressed by the EPR panel. They’ve made recommendations to:

Toughen rules on disclosing wholesale market information - As the EPR has highlighted, there are still big gaps in the EA’s rules surrounding information disclosure, and this was seen last year when the high spring prices were sprung on the entire market - not just us - with little warning. There was little advance information about how and why prices were managing to defy all models and projections. That wouldn’t have been the case if a) the rules were tougher, b) gaps in the rules were identified and fixed, and c) the rules that exist were actually enforced rigorously.

Introduce mandatory market-making obligations - Right now, the hedge market is largely run on a ‘handshake agreement’ that assumes the gentailers will create a fair market for the other retailers. The current arrangement means there’s the potential for gentailers to upset the electricity applecart and create a market that’s, in the words of the panel, ‘fragile’ and unsteady (which is what we saw last year) - and it can happen within the rulebook. In our opinion, and that of the EPR panel, the current regulations aren’t working, and we need to see more robust regulation that is enforced strictly.

What next?

The EA’s decision on our UTS claim is due out later this month, and we’ll be watching like a hawk to see what action is taken. Because when our electricity sector starts to work in the interests of ALL consumers, we all win - and that’s what the fight for a fairer electricity market is all about.

Update - On Thursday 28 Feb, the EA announced their findings that there was no unfair trading situation between 14 September 2018 to 1 November 2018. We’re disappointed that the EA didn’t uphold our claim, and again, it highlights to us just how broken the electricity market is. However, we’re encouraged that the EA has mentioned that, as well as investigating a possible breach of the Code, they’ll be planning a number of changes that target better information disclosure and hedge market improvements. So, we’ll be paying very close attention to see what changes they, along with the EPR recommendations, bring about.